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by Charalambos Pissouros

UK PM Johnson Calls for Election, ECB Sticks to its Plans, Riksbank to Hike in Dec.

Yesterday, UK PM Boris Johnson called for early elections to take place on December 12th, a call on which lawmakers will vote on Monday, but with opposition parties already rejecting the idea, we see the case of Johnson’s bit winning as a hard task. In the central bank spectrum, the ECB and the Norges Bank provided little new information with regards to their future plans, while the Riksbank signaled a December hike.

UK PM Johnson Calls for Dec. Election, Parliament to Vote on Monday

The pound traded lower against all but one of the other G10 currencies on Thursday and during the Asian morning Friday. The only currency that failed to capitalize against its British counterpart was NZD, with GBP/NZD found virtually unchanged this morning.

GBP performance G10 currencies

Although a no-deal Brexit on October 31st appears to be much less likely in recent days, the riddle of how and when the UK will exit the EU remains unresolved. Yesterday, UK PM Boris Johnson called for an early election to take place on December 12th in an attempt to break the impasse, with UK lawmakers set to vote on that on Monday. Labor leader Jeremy Corbyn said that he would like to wait for the EU’s decision with regards to the requested extensions before deciding how to vote, adding that he will support an election only when the risk of a disorderly exit is vanished.

We believe that Johnson is likely to suffer another defeat on Monday. His call needs the support of two-thirds in Parliament in order to take flesh, something which appears a hard task taking into account that opposition parties have rejected the offer.

Today, the EU had been expected to discuss and announce the length of a potential new extension, but reports suggested that officials may decide to wait for the outcome of the election motion in the UK Parliament. According to sources, the EU was set to offer a three-month “flextension”, meaning that the divorce could take place earlier if the deal was ratified by both the UK and EU Parliaments.

As for our view, the fact that that the EU appears willing to grant another extension, and thereby take a no-deal Brexit next week off the table, is a positive development, but it seems that GBP-traders have already priced that in. Now the question is what the length of the new delay would be and whether the two sides will manage to finalize the process during that period. Prolonging all this uncertainty may weigh further on business investment and the broader economy, something that could eventually hurt the pound again. What’s more, it could force BoE policymakers, the hands of whom are tied due to all this drama, to abandon their hiking bias.

GBP/USD – Technical Outlook

GBP/USD traded lower yesterday after it hit resistance near the 1.2950 zone. That said, the slide was stopped by the 1.2790 level, slightly below the 50-EMA on the 4-hour chart. After hitting the psychological zone of 1.3000, the pair has started printing lower highs and lower lows, but we prefer to wait for a clear dip below 1.2755 before we get more confident on a short-term reversal to the downside.

Such a break may initially aim for the 1.2655 barrier, which is marked as a support by the low of October 16th. The rate could stall around there or even rebound somewhat. However, as long as it stays below 1.2755, we would see decent chances for the bears to take charge again and aim for another test near 1.2655. If they prove strong enough to overcome that hurdle, then we may see them extending the slide towards the low of October 14th, at around 1.2515.

Shifting attention to our short-term oscillators, we see that the RSI lies below 50, while the MACD, already below its trigger line, has just touched its toe below zero. Both indicators detect negative momentum, but the RSI is now pointing sideways, which enhances our choice to wait for a break below 1.2755 before we start examining lower levels.

On the upside, a break above the psychological zone of 1.3000 may be the signal for the bulls to take back full charge. Such a move may indicate the resumption of the prevailing short-term uptrend and could pave the way towards the high of May 7th, at around 1.3130, or the peak of the day before, near 1.3175.

GBP/USD 4-hour chart technical analysis

ECB Sings the Same Song, Riksbank Set to Hike in December

At Draghi’s last meeting as the ECB Chief, the Bank decided to keep its policy and guidance unchanged, reiterating that net asset purchases will be restarted on November 1st and that interest rates are expected to remain at their present or lower levels until the inflation outlook robustly converges to its aim. At the press conference, Draghi just repeated that the Governing Council remains ready to adjust all of its instruments and that the risks surrounding the Euro-area outlook remain tilted to the downside. The euro moved very little at this meeting, but finished the day lower against most of its major counterparts, perhaps weighed on by another round of disappointing Euro-area PMIs.

Apart from the ECB, we had two more central banks on yesterday’s agenda: The Riksbank and the Norges Bank. Starting with the Riksbank, the world’s oldest central bank kept its repo rate unchanged at -0.25%, but changed its forward guidance saying that the rate will most probably be raised to zero in December. Remember that the previous guidance was for the rate to be increased towards the end of the year or the beginning of the next. The Swedish Krona rallied at the time of the decision, as the Bank’s willingness to hike in December, in the midst of a struggling domestic economy, may have come as a surprise to market participants. That said, the currency was quick to give back those gains, finishing the day lower against its US counterpart and virtually unchanged against the euro, perhaps as officials revised downwards their rate-path projections, noting that the rate will be unchanged for a prolonged period after the expected December rise.

Passing the ball to the Norges Bank, its meeting proved a non-event as the Bank kept its policy rate unchanged at +1.50% and noted that new information indicates that the policy rate outlook is little changed since September. It also reiterated the guidance that the rate will most likely remain at the present level in the coming period.

EUR/SEK – Technical Outlook

EUR/SEK tumbled after the Riksbank announced that it will probably hike rates in December. However, the pair found strong support at 10.6500 and quickly rebounded to recover all those losses. The price structure on the 4-hour chart remains of lower highs and lower lows, and thus, we will maintain a bearish stance with regards to this exchange rate.

The latest recovery may continue for a while more, perhaps for the rate to challenge again the 10.7600 territory, but if the bears decide to step in from near that zone, we would expect them to push lower towards the 10.7150 area. If they are not willing to hit the brakes around there, we may see the slide extending again towards the 10.6500 obstacle.

Taking a look at our momentum studies, the RSI rebounded from near its 30 line and now looks to be approaching the 50 mark, while the MACD, although negative, has bottomed and crossed above its trigger line. These indicators are in support of our view with regards to further corrective recovery before the next negative leg.

In order to abandon the bearish case, we would like to see the rebound extending above 10.7830. The bulls may then decide to aim for the 10.8100 zone, which acted as a decent support between October 11th an 17th, where another break may set the stage for the 10.8500 area.

EUR/SEK 4-hour chart technical analysis

As for Today’s Events

During the European morning, we get the German Ifo Survey for October. The current assessment index is expected to have increased to 97.9 from 98.5, while the expectations one is anticipated to have held steady at 90.8.  That said, bearing in mind that both the current conditions and economic sentiment indices of the ZEW survey for the month declined, we see the risks surrounding the Ifo forecasts as tilted to the downside.

From the US, we get the final UoM consumer sentiment index for October, which is expected to be revised up to 96.0 from 93.2.


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